The overall objective of is research project is to evaluate an expprimental prepayment plan for the Iowa Medicaid drug program. The primary objective is to evaluate the impact of the prepayment program on the quality and cost aspects of the drug use process. Secondary objectives include an analysis of the impact of the prepayment program on the administrative costs of claim processing as well as the compilation of a case study on the development and initiation of the program. Since we are presently only 9 months into a two year project all our data are in a preliminary stage and needs further refinement. However, it does appear that considerable savings in administrative costs could result from the implementation of a prepayment drug program. There also appears to be a greater rate of generic substitution under prepayment. Furthermore, there appears to be overall cost savings in the capitation system. Because of these cost savings as well as the positive implications for the quality of drug therapy, capitation reimbursement may be a viable alternative for drug programs under Medicaid or a national health insurance package.